Sunday, August 29, 2010

The Investment Dar - The Zakat Issue

As is often the case, our readers contribute greatly to the posts here, providing additional information and correcting my mistakes.

Such is the case with two recent posts on TID and Zakat.  The first here.  The second here.  And at the latter you'll find the reader's comments that sparked this post.

Let's start by going over the history.

In the first, I relayed a comment in Al Qabas that the Creditors' Coordinating Committee had been surprised by TID advising them that some KD12 to 15 million of Zakat was unpaid.

In the second, I got into a discussion with one of our readers, who prefers to remain Anonymous, about whether there was a delay in payment of Zakat by TID.  He directed me to a source that I should have reviewed before uncritically repeating what Al Qabas had said in its article:  TID's financial statements. 

Like reading one's computer hardware and software manual before proceeding, it really does pay to read the financials.  (And this exchange has occasioned a new "label" or "tag" - "RTF" - shorthand for Read the Financials).

So there are three issues here:
  1. Did TID "surprise" its creditors by recently informing them of pre-existing liability it had not disclosed before?
  2. Has TID delayed payment of Zakat?
  3. And related to the above two topics, how is TID calculating its Zakat obligation?
On the first question, a quick glance at TID's 2008 audited financials Note #15 shows that TID has disclosed its unpaid Zakat obligation.  KD11.4 million of Zakat is shown as part of the balance of Payables for FYE 2008.  Comparable balances disclosed earlier were KD5.5 million at FYE 2007 and KD1.3 million at FYE 2006.  So no surprise to those who RTF. 

As a side note, if you look carefully at the Consolidated Statement of Changes in Equity, you'll notice that TID's Zakat appropriations from Reserves are a year in arrears.  That is,  the appropriation in 2008 was actually for Fiscal Year 2007.  So, it's likely that there is a Zakat amount due for 2008 to be reflected in 2009's annual report and for 2009 to be reflected in 2010's annual report. Again careful readers of TID's financials will not be surprised that these obligations are there.  What will be the unknown is their amounts.

It may sound surprising that after reporting a major loss in 2008, TID would be subject to any Zakat at all for that year.

So let's turn to how TID calculates Zakat.  There are two ways:
  1. A statutory obligation as per Law 46 of 2006.
  2. Its adherence to Shari'ah. 
As per Law 46 of 2006 (English here and Arabic here), all companies in Kuwait (except government entities) are required to pay 1%  of income to the Ministry of Finance as Zakat.

And we learn from Note 38 to the 2007 financials:
During the year ended 31 December 2007, the executive regulations of Zakat has been issued and which stipulates that, each Kuwaiti shareholding company should deduct 1% of its net profit as Zakat and should be forwarded to Ministry of Finance. The amount of Zakat expense has been calculated on the basis of the Group’s profit multiplied by the number of days starting from the date of issuing the executive regulations  on 9 December 2007 to 31 December 2007.
What this means is that TID is complying strictly with its statutory obligations.  The Law came into force on 9 December and so its 2007 income subject to statutory Zakat is  only 22 days out of the year.  Because there was a loss in 2008, no statutory Zakat is due for that year.

Beyond its legal obligation, since Fiscal Year 2005, TID has been computing Zakat as follows (Note # 2.17):
Based on the recommendation of the Sharia’a Supervisory Board, the Group started to calculate Zakat based on Wea’a Al-Zakat which consists of assets and liabilities that are subject to Zakat. Zakat is deducted from the voluntary reserve.
Note 3.18 in the 2008 audited financials confirms that the Company is still calculating Zakat on this basis - which means there is likely to be a provision for 2008 despite the loss that year because this Zakat is calculated based on assets and liabilities - which while diminished are still there.  To complete the story, prior to 2005, TID computed Zakat on the basis of its adjusted Equity.

TID only recognizes the statutory Zakat (Law 46/2006) amount as an expense in its financials.   The  Wea'a Zakat amount is directly charged against Reserves.  Therefore, this amount does not appear as an expense on TID's income statement.  I presume that TID adjusts this Wea'a Zakat amount for the statutory amount so it doesn't "double pay" Zakat.

As per Note 16 in the 2007 audited report  you'll notice that the statutory amount is a relatively small KD78,874  - less than 1.9% of the net KD4.2 million that TID added that year to accrued Zakat. 

I'm making the presumption here that since the Wea'a Zakat amount is voluntary, there is not necessarily a deadline for its distribution.  Nor are the amounts required to be paid to the Government or another third party.  That means that the Company has discretion to whom and when to distribute.   Technically then TID would not violated any requirement for payment.  Strictly speaking, it would not be "late".

Though if I'm wrong on this latter point, I hope someone will post and correct me.

But let's look a bit deeper at the accumulation of unpaid Zakat obligations by looking at two tables.

The first is an attempt to derive the cash payments of Zakat that TID actually made during the period 2005 through 2008.   Amounts are in thousands of KDs.

Year Open Bal Additions Close Bal Payments 
2005         2.7   1,096.9     320.5    779.1
2006    320.5   2,848.3   1,342.0 1,826.8
2007 1,342.0   5,746.4   5,541.31,547.1
2008 5,541.3   6,734.7 11,373.8   902.2
TOTAL16,426.3 5,055.2 

Notes:
  1. Derived Payments = Open Balance + Additions - Ending Balance.
  2. Opening and Ending Balances are from the Payables Notes in TID's Annual Reports for the period.
  3. Additions are per the Consolodiated Statement of Changes in Equity.  You will notice that for a couple of fiscal years there is an increment to Zakat from TID's subsidiaries which appears as a separate entry to Retained Earnings.  The Zakat additions for TID are charged to Reserves.  I have used both in my calculations for Additions.
  4. 2007 Additions in the table above includes KD78,874 of Statutory Zakat as there was no adjustment to net income for that year to back it out.
Now let's take a look at Zakat payments per year as a percent of Opening Balance and Additions during the year.

Year Percent 
2005 71% 
2006 58% 
2007 22% 
2008 7% 

Clearly, there is a sharp decline in amounts disbursed in 2007 well before the crisis started.  And the overall distributions during this period are some 30.8% of the Zakat accrued.

Perhaps, the cause is having to deal with larger amounts and the need to thoroughly vet a recipient before  disbursing funds.   Or, perhaps, it is a cash management issue.

If the timing of distributions is purely discretionary, then I wonder if the lenders can insist that Zakat distributions be stopped or greatly limited until they are repaid?

1 comment:

Anonymous said...

great analysis, thanks